MY ER Fima Corporation Berhad – Oct 2016

Stock Code

3107.KL

Investment Rating

SELL

Current Price

RM 2.18

Target Price

RM 1.70

Estimated Return

-21.88%

Market Cap

RM 526m (as of 14/10/16)

Company Profile:Engage in printing of security and confidential documents such as travel documents, licenses and certificates (accounted c. 70% of the revenue). Circa 30% of the revenue is from oil palm production and processing. And small revenue contribution from property management and investment holding.

Investment Considerations:

1) Threat of digitalization and highly dependent on government contract weaken its attractivenessTechnological advancements might reduce the earnings visibility of the company in the long run (paper-based documents being replaced by mobile systems). Bank notes printing services, although, enjoys high barriers to entry, but the significant deterioration in operating efficiency makes the company less attractive. Large dependent on Malaysia government poses greater concentration risk as any unexpected event will be detrimental to the business.

2) Weak contribution from property management segment and greater uncertainty over the prices of CPOThe property management division’s assets were higher than that of printing and oil palm division but delivered the lowest profit (at a low single digit percentage) which significantly dragged down the ROE (see the report). The volatility of CPO prices also dragged down the profit generation and the division continues to consume higher cash in the form of capital expenditure (26% of sales in FY 2016), weakened its cash flow generation. Indeed, the free cash flow declined from RM 98m in FY 2011 to RM 46m in FY 2016. Despite the poor performance, the company is positively supported by net cash position (currently no debt). With cash of RM 183m in hand, which represents 34.7% of the market cap. RHB currently has a neutral outlook for plantation industry hence we believe there is a high probability that the oil palm segment will not contribute materially to the upcoming financial performance.

3) Weaker dividend coverage and significant deteriorated financial performance over time.The investors might be attracted by the decent dividend yield of over 5.79%, but we believe that the dividend’s quality has reduced. The dividend coverage in FY 2011 was around 6.5x and reduced to 1.5x in FY 2016. The company is in a dilemma, cutting dividend (to retain higher cash) will send bad signal to the market while maintaining it (without a material improvement in financials) will reduce the net cash position. And the financial has deteriorated significantly. If the investors are investing based on the attractive dividend yield, they need to be aware that it might not be sustainable. We valued the company based on DDM and incorporated sensitivity analysis on the assumptions. We assigned a sell rating as the fair value of RM1.70 suggests a downside risk of 21.88%

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